Damodaran on Valuation

16.4. REASONS FOR COMPLEXITY

Firms with complicated financial statements have to bear much of the responsibility for the complexity, no matter how strong or weak the accounting standards are. This is because accounting standards establish a floor on what has to be revealed and not a ceiling. Firms that want to reveal more to their investors can always do so. Infosys, an Indian software firm, for example, has financial statements that are more transparent than those provided by most U.S. firms, even though Indian accounting requirements on disclosure are much weaker than U.S. accounting stan-dards.^[] In this section, we consider some of the reasons why firms may choose to make their financial statements more diffuse and difficult to understand.

^[] The incentive to provide more complete financial statements tends to be greatest for those emerging market companies that have listings in developed markets. Chinese companies listed in the United States, for instance, provide far more information on performance and governance than Chinese companies that are listed only in Shanghai.

16.4.1. Control

Many incumbent managers fear hostile takeovers, and attempt to preempt hostile acquirers by structuring a bewildering array of subsidiaries and holding companies to hide their assets, and by creating new financial securities—common stock with different voting rights, for example. How do these actions keep hostile acquirers away? First, information that is not available to investors is also ...